Flagstar Bancorp (FBC) 10-Q 2000 Q3 Quarterly report

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Mark One
	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2000
	OR
	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No.:  0-22353

                FLAGSTAR BANCORP, INC.                
(Exact name of registrant as specified in its charter)

Michigan	38-3150651
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
5151 Corporate Drive, Troy, Michigan	48098-2639
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:(248) 312-2000

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes          No   .

      As of November 10, 2000, 11,879,453 shares of the registrant’s Common Stock, $0.01 par value, were outstanding.

TABLE OF CONTENTS

Computation of Net Earnings Per Share

Financial Data Schedule

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

The unaudited condensed consolidated financial statements of the Registrant are as follows:

Consolidated Statements of Financial Condition — September 30, 2000 ( unaudited ) and December 31, 1999.

Unaudited Consolidated Statements of Earnings — For the three and nine months ended September 30, 2000 and 1999.

Unaudited Consolidated Statements of Cash Flows — For the nine months ended September 30, 2000 and 1999.

Condensed Notes to Consolidated Financial Statements.

When used in this Form 10-Q or future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases or other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “would be”, “will allow”, “intends to”, “will likely result”, “are expected to”, “will continue”, “is anticipated”, “estimate”, “project”, or similar expressions are intended to identify “forward looking statement” within the meaning of the Private Securities Litigation Reform Act of 1995.

The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities and competitive and regulatory factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected.

The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

2

Flagstar Bancorp, Inc.

Consolidated Statements of Financial Condition

(in thousands)

				At September 30,			At December 31,
Assets				2000			1999
				(unaudited)
Cash and cash equivalents				$	39,769		$	118,636
	Loans receivable Mortgage loans available for sale				1,900,961			2,230,381
		Loans held for investment			3,299,591			747,185
		Less: allowance for losses			(25,000	)		(23,000	)
Loans receivable, net					5,175,552			3,808,731
Federal Home Loan Bank stock					98,800			79,850
Other investments					3,744			—
Total earning assets					5,278,096			3,888,581
Accrued interest receivable					38,516			26,629
Repossessed assets					23,425			21,364
Premises and equipment					97,094			46,979
Mortgage servicing rights					102,374			131,831
Other assets					59,368			76,019
			Total assets	$	5,638,642		$	4,310,039
Liabilities and Stockholders’ Equity
Liabilities
Retail deposits				$	1,754,207		$	1,293,183
Wholesale deposits					1,552,892			967,780
Federal Home Loan Bank advances					1,732,000			1,477,000
Long term debt					74,750			74,750
Total interest bearing liabilities					5,113,849			3,812,713
Accrued interest payable					41,018			15,689
Undisbursed payments on loans serviced for others					44,095			69,231
Escrow accounts					71,935			75,340
Liability for checks issued					55,775			30,426
Federal income taxes payable					51,364			50,238
Other liabilities					70,272			70,688
			Total liabilities		5,448,308			4,124,325
Stockholders’ Equity
Common stock — $.01 par value, 40,000,000 shares authorized, 13,384,923 and 13,699,823 shares issued and 11,885,953 and 12,891,473 shares outstanding at September 30, 2000 and December 31, 1999, respectively					119			129
Additional paid in capital					5,249			18,307
Retained earnings					184,966			167,278
			Total stockholders’ equity		190,334			185,714
			Total liabilities and stockholders’ equity	$	5,638,642		$	4,310,039

The accompanying notes are an integral part of these statements.

3

Flagstar Bancorp, Inc.

Unaudited Consolidated Statements of Earnings

(in thousands)

		For the quarter ended				For the nine months ended
		September 30,				September 30,
		2000		1999		2000		1999
Interest Income
Loans		$	101,211	$	59,009	$	268,403	$	167,683
Other			3,213		1,225		7,335		3,643
	Total		104,424		60,234		275,738		171,326
Interest Expense
Deposits			51,002		28,614		126,160		83,792
FHLB advances			25,784		12,440		72,849		32,391
Other			2,998		3,572		9,477		8,487
	Total		79,784		44,626		208,486		124,670
Net interest income			24,640		15,608		67,252		46,656
Provision for losses			2,400		1,459		8,318		4,504
Net interest income after provision for losses			22,240		14,149		58,934		42,152
Non-Interest Income
Loan administration			3,530		4,725		12,450		15,395
Net gain on loan sales			4,170		1,187		9,698		32,143
Net gain on sales of mortgage servicing rights			5,335		3,961		11,252		4,883
Other fees and charges			4,471		4,068		12,969		10,374
	Total		17,506		13,941		46,369		62,795
Non-Interest Expense
Compensation and benefits			9,667		8,840		29,190		27,987
Occupancy and equipment			7,930		5,450		21,402		15,235
General and administrative			8,041		2,752		21,183		15,141
	Total		25,638		17,042		71,775		58,363
Earnings before federal income taxes			14,108		11,048		33,528		46,584
Provision for federal income taxes			5,088		3,844		12,124		16,318
Net Earnings		$	9,020	$	7,204	$	21,404	$	30,266
Earnings per share – basic		$	0.75	$	0.52	$	1.75	$	2.21
Earnings per share – diluted		$	0.71	$	0.51	$	1.71	$	2.14

The accompanying notes are an integral part of these statements

4

Flagstar Bancorp, Inc.

Unaudited Consolidated Statements of Cash Flows

(in thousands)

				For the nine months ended September 30,
				2000			1999
Operating Activities
	Net earnings			$	21,404		$	30,266
	Adjustments to reconcile net earnings to net cash used in operating activities
		Provision for losses			8,318			4,504
		Depreciation and amortization			19,289			18,365
		Net loss (gain) on the sale of assets			89			(190	)
		Net gain on loan sales			(11,252	)		(32,143	)
		Gain on sales of mortgage servicing rights			(9,698	)		(3,671	)
		Proceeds from sales of loans available for sale			5,442,570			11,164,466
		Originations and repurchases of loans available for sale, net of principal repayments			(6,997,109	)		(11,545,571	)
		(Increase) decrease in accrued interest receivable			(11,887	)		1,120
		Decrease in other assets			15,681			58,040
		Increase (decrease) in accrued interest payable			25,329			(486	)
		Increase (decrease) in liability for checks issued			25,349			(22,663	)
		Decrease in current federal income taxes payable			(10,851	)		(15,458	)
		Provision for deferred federal income taxes payable			11,977			11,977
		Decrease in other liabilities			(415	)		(6,386	)
			Net cash used in operating activities		(1,471,206	)		(337,830	)
Investing Activities
		Maturity of other investments			(3,744	)		500
		Originations of loans held for investment, net of principal repayments			172,256			(397,929	)
		Purchase of Federal Home Loan Bank stock			(18,950	)		(1,212	)
		Proceeds from the disposition of repossessed assets			15,362			14,196
		Acquisitions of premises and equipment			(58,981	)		(12,486	)
		Proceeds from the disposition of premises and equipment			109			—
		Increase in mortgage servicing rights			(105,977	)		(167,202	)
		Proceeds from the sale of mortgage servicing rights			136,454			153,646
			Net cash provided by (used in) investing activities		136,529			(410,487	)
Financing Activities
		Net increase in deposit accounts			1,046,136			195,288
		Net increase in Federal Home Loan Bank advances			255,000			586,980
		Issuance of Junior Subordinated Debentures			—			74,750
		Net disbursement of payments of loans serviced for others			(25,136	)		(113,035	)
		Net (disbursement) receipt of escrow payments			(3,406	)		2,766
		Net proceeds from the exercise of common stock options			—			361
		Common stock repurchases			(13,069	)		(1,464	)
		Dividends paid to stockholders			(3,716	)		(3,556	)
			Net cash provided by financing activities		1,255,810			742,090
Net decrease in cash and cash equivalents					(78,867	)		(6,227	)
Beginning cash and cash equivalents					118,636			75,799
Ending cash and cash equivalents				$	39,769		$	69,572
Supplemental disclosure of cash flow information:
		Loans receivable transferred to repossessed assets		$	23,161		$	14,717
		Total interest payments made on deposits and other borrowings		$	183,157		$	125,157
		Federal income taxes paid		$	19,500		$	10,000
		Loans available for sale transferred to loans held for investment		$	1,891,704		$	581,203

The accompanying notes are an integral part of these statements

5

Flagstar Bancorp, Inc.

Notes to Consolidated Financial Statements

Note 1 — Nature of Business

Flagstar Bancorp, Inc. (“Flagstar” or the “Company”), is the holding company for Flagstar Bank, FSB (the “Bank”), a federally chartered stock savings bank founded in 1987. Flagstar’s primary business consists of attracting deposits from the general public and originating or acquiring residential mortgage loans. The Company also acquires funds on a wholesale basis from a variety of sources, services a significant volume of loans for others, and to a lesser extent makes consumer loans, commercial real estate loans, and non-real estate commercial loans.

The Bank is a member of the Federal Home Loan Bank System (“FHLB”) and is subject to regulation, examination, and supervision by the Office of Thrift Supervision (“OTS”) and the Federal Deposit Insurance Corporation (“FDIC”). The Bank’s deposits are insured by the FDIC through the Savings Association Insurance Fund (“SAIF”).

Note 2. Basis of Presentation

The accompanying consolidated unaudited financial statements of Flagstar Bancorp, Inc. (the “Company”), have been prepared in accordance with generally accepted accounting principles for interim information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All interim amounts are subject to year-end audit, the results of operations for the interim period herein are not necessarily indicative of the results that may be expected for the year ending December 31, 2000.

6

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Selected Financial Ratios

		For the quarter ended						For the nine months ended
		September			September			September			September
		30, 2000			30, 1999			30, 2000			30, 2000
Return on average assets			0.65	%		0.76	%		0.57	%		1.14	%
Return on average equity			19.15	%		15.58	%		15.47	%		22.67	%
Efficiency ratio			60.06	%		56.58	%		62.32	%		52.44	%
Equity/assets ratio (average for the period)			3.41	%		4.89	%		3.68	%		5.01	%
Mortgage loans originated or purchased		$	2,651,880		$	3,043,968		$	7,065,055		$	12,257,897
Mortgage loans sold		$	1,942,227		$	2,869,238		$	5,364,332		$	11,045,978
Interest rate spread			1.84	%		1.82	%		1.81	%		1.82	%
Net interest margin			1.92	%		1.91	%		1.93	%		2.01	%
Charge-offs to average loans outstanding			0.19	%		0.18	%		0.19	%		0.13	%
		September			June 30,			December			September
		30, 2000			2000			31, 1999			30, 1999
Equity-to-assets ratio			3.38	%		3.37	%		4.31	%		5.00	%
Tangible capital ratio (1)			5.31	%		5.37	%		6.76	%		7.91	%
Core capital ratio (1)			5.32	%		5.39	%		6.80	%		7.96	%
Risk-based capital ratio (1)			9.65	%		9.89	%		12.26	%		16.69	%
Total risk-based capital ratio (1)			10.45	%		10.68	%		13.16	%		17.77	%
Book value per share		$	16.01		$	15.32		$	14.41		$	13.93
Average shares outstanding			11,886			12,027			12,891			13,597
Mortgage loans serviced for others		$	6,431,943		$	8,402,411		$	9,519,926		$	11,308,993
	Value of mortgage servicing rights		1.59	%		1.49	%		1.38	%		1.37	%
Allowance for losses to non performing loans			50.0	%		53.3	%		55.0	%		54.8	%
Allowance for losses to total loans			0.48	%		0.53	%		0.60	%		0.64	%
Non performing assets to total assets			1.30	%		1.21	%		1.47	%		1.66	%
Number of bank branches			48			40			35			32
Number of loan origination centers			38			38			38			37
Number of correspondent offices			15			15			16			17
Number of employees			1,923			1,762			1,627			1,668

(1) Based on adjusted total assets for purposes of tangible capital and core capital, and risk-weighted assets for purposes of the risk-based capital and the total risk-based capital. These ratios are applicable to Flagstar Bank only.

7

Results of Operations

Net Earnings

Net earnings for the three months ended September 30, 2000 were $9.0 million ($0.71 per share-diluted), a $1.8 million increase from the $7.2 million ($0.51 per share-diluted) reported for the comparable 1999 period. The increase resulted primarily from a $9.0 million increase in net interest income and a $3.6 million increase in non-interest income, offset by a $8.6 million increase in operating expenses.

Net earnings for the nine months ended September 30, 2000 were $21.4 million ($1.71 per share-diluted), a $8.9 million decrease from the $30.3 million ($2.14 per share-diluted) reported for the nine months ended September 30, 1999. The decrease resulted primarily from a $16.4 million decrease in non-interest income and a $13.4 million increase in operating expenses, offset by a $20.6 million increase in net interest income.

Net Interest Income

The Company continues to increase the amount of net interest income recorded in each quarterly period. These increases are a direct result of the large increases in average earning assets recorded by the Company. The growth experienced in 2000 was recorded with a nominal increase in the spread between earning assets and paying liabilities. Management plans to continue to increase the size of the earning asset portfolio in future quarters in relation to regulatory limits. As a regulated savings institution the Bank must keep capital levels at a minimum of 5.00% of total assets.

Net interest income during the three months ended September 30, 2000 increased $9.0 million, or 57.7%, to $24.6 million, from $15.6 million recorded for the 1999 period. This increase was due to a $1.9 billion increase in average interest-earning assets between the comparable periods, offset by a $1.8 billion increase in interest-bearing liabilities necessary to fund the growth. At the same time, the Company’s interest rate spread increased from 1.82% in the 1999 period to 1.84% for the three months ended September 30, 2000. The increased spread along with the $24.7 million increase in the excess of average earning assets over average interest-bearing liabilities resulted in an increase in the Company’s net interest margin by 0.01% to 1.92% for the three months ended September 30, 2000 from 1.91% for the comparable 1999 period.

Net interest income for the nine months ended September 30, 2000, increased $20.6 million, or 44.1%, to $67.3 million from $46.7 million for the comparable 1999 period. This increase was due to a $1.5 billion increase in average interest-earning assets between the comparable periods, offset by a $1.6 billion increase in interest-bearing liabilities necessary to fund the growth. The Company’s interest rate spread decreased nominally from 1.82% for the 1999 period to 1.81% for the nine months ended September 30, 2000. The slight decrease in the spread and the $10.8 million decrease in the excess of average earning assets over average interest-bearing liabilities, resulted in a net decrease in the Company’s net interest margin by 0.08% to 1.93% for the nine months ended September 30, 2000 from 2.01% for the comparable 1999 period.

8

AVERAGE YIELDS EARNED AND RATES PAID

Table 1 and Table 2 presents interest income from average earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates. Interest income from earning assets includes the amortization of net premiums and the amortization of net deferred loan origination costs. Nonaccruing loans were included in the average loan amounts outstanding.

TABLE 1

		Quarter ended September 30,
		2000							1999
		Average				Yield/			Average				Yield/
		Balance		Interest		Rate			Balance		Interest		Rate
		(in thousands)
Interest-earning assets:
Loans receivable, net		$	4,930,794	$	101,211		8.14	%	$	3,186,683	$	59,009		7.35	%
FHLB stock			98,800		2,111		8.50			59,050		1,190		8.00
Other			82,156		1,102		5.32			2,744		35		5.06
Total interest-earning assets			5,111,750	$	104,424		8.13	%		3,248,477	$	60,234		7.36	%
Other assets			417,332							531,999
Total assets		$	5,529,082						$	3,780,476
Interest-bearing liabilities:
Deposits		$	3,316,211	$	51,002		6.10	%	$	2,142,661	$	28,614		5.30	%
FHLB advances			1,578,929		25,784		6.48			897,175		12,440		5.50
Other			137,561		2,998		8.65			154,284		3,572		9.19
Total interest-bearing liabilities			5,032,701	$	79,784		6.29	%		3,194,120	$	44,626		5.54	%
Other liabilities			307,938							401,380
	Stockholders equity		188,443							184,976
Total liabilities and Stockholders equity		$	5,529,082						$	3,780,476
Net interest-earning assets		$	79,049						$	54,357
Net interest income				$	24,640						$	15,608
Interest rate spread							1.84	%						1.82	%
Net interest margin							1.92	%						1.91	%
Ratio of average interest-
Earning assets to Interest-bearing liabilities							102	%						102	%

9

TABLE 2
AVERAGE YIELDS EARNED AND RATES PAID

		Nine months ended September 30,
		2000							1999
		Average				Yield/			Average				Yield/
		Balance		Interest		Rate			Balance		Interest		Rate
		(in thousands)
Interest-earning assets:
Loans receivable, net		$	4,511,952	$	268,403		7.93	%	$	3,039,159	$	167,683		7.36	%
FHLB stock			92,832		5,674		8.16			58,697		3,511		8.00
Other			40,943		1,661		5.41			3,331		132		5.28
Total interest-earning assets			4,645,727	$	275,738		7.92	%		3,101,187	$	171,326		7.37	%
Other assets			368,377							452,914
Total assets		$	5,014,104						$	3,554,101
Interest-bearing liabilities:
Deposits		$	2,874,905	$	126,160		5.86	%	$	2,084,079	$	83,792		5.38	%
FHLB advances			1,538,479		72,849		6.33			794,468		32,391		5.45
Other			145,828		9,477		8.68			125,351		8,487		9.05
Total interest-bearing liabilities			4,559,212	$	208,486		6.11	%		3,003,898	$	124,670		5.55	%
Other liabilities			270,439							372,231
	Stockholders equity		184,453							177,972
Total liabilities and Stockholders equity		$	5,014,104						$	3,554,101
Net interest-earning assets		$	86,515						$	97,289
Net interest income				$	67,252						$	46,656
Interest rate spread							1.81	%						1.82	%
Net interest margin							1.93	%						2.01	%
Ratio of average interest- earning assets to interest-bearing liabilities							102	%						103	%

10

RATE/VOLUME ANALYSIS

Table 3 and Table 4 present the dollar amount of changes in interest income and interest expense for the components of earning assets and interest-bearing liabilities, which are presented in Tables 1 and 2. Table 3 and 4 distinguishes between the changes related to average outstanding balances (changes in volume while holding the initial rate constant) and the changes related to average interest rates (changes in average rates while utilizing the average outstanding balances).

TABLE 3

	Quarter ended September 30,
				2000 versus 1999
	Increase (Decrease) due to:
	Rate			Volume			Total
Interest Income:					(In Thousands	)
Loans receivable, net	$	9,738		$	32,463		$	42,202
FHLB stock		124			797			921
Other		53			1,014			1,067
Total	$	9,916		$	34,274		$	44,190
Interest Expense:
Deposits	$	6,633		$	15,755		$	22,388
FHLB advances		3,868			9,476			13,344
Other		(186	)		(388	)		(574	)
Total	$	10,315		$	24,843		$	35,158
Net change in net interest income		($399	)	$	9,431		$	9,032

TABLE 4

	Nine months ended September 30,
				2000 versus 1999
	Increase (Decrease) due to:
	Rate			Volume			Total
Interest Income:					(In Thousands	)
Loans receivable, net	$	19,288		$	81,432		$	100,720
FHLB stock		113			2,050			2,163
Other		40			1,489			1,529
Total	$	19,441		$	84,971		$	104,412
Interest Expense:
Deposits	$	10,350		$	32,018		$	42,368
FHLB advances		10,154			30,304			40,458
Other		(405	)		1,395			990
Total	$	20,099		$	63,717		$	83,816
Net change in net interest income		($658	)	$	21,254		$	20,596

11

Provision for Losses

During the three months ended September 30, 2000, the provision for losses was $2.4 million. The provision for losses recorded during the nine months ended September 30, 2000 was $8.3 million. During the nine month period, $2.0 million of the provision was used to increase the allowance for losses. The allowance, which totals $25.0 million, is 0.48% of loans and 50.0% of non-performing loans at September 30, 2000. The allowance stood at 0.64% and 0.60% of loans and 54.8% and 55.0% of non performing loans at September 30, 1999 and December 31, 1999, respectively.

Non-performing loans stood at $50.0 million at September 30, 2000, up from $46.9 million at June 30, 2000, and $41.8 million at December 31, 1999, an increase of 6.6% and 19.6%, respectively. Net charge-offs were an annualized 0.19% of average loans outstanding for both the three months and nine months ended September 30, 2000.

Non-Interest Income

During the three months ended September 30, 2000, non-interest income increased $3.6 million, or 25.9%, to $17.5 million from $13.9 million. This increase was attributable to increases in net gain on loan sales, net gain on the sales of mortgage servicing rights, and other fees and charges offset by a decrease in loan administration fees.

During the nine months ended September 30, 2000, non-interest income decreased $16.4 million, or 26.1%, to $46.4 million from $62.8 million. This decrease was attributable to a dramatic decrease in net gain on loan sales along with a decrease in loan administration fees offset by increases in net gain on the sales of mortgage servicing rights and other fees and charges.

      Loan Administration

Net loan administration fee income decreased to $3.5 million during the three months ended September 30, 2000, from $4.7 million in the 1999 period. This decrease resulted primarily from a decrease in the amount of mortgage loans serviced for others during the 2000 period. Fee income before the amortization of serving rights totaled $6.4 million for the three months ended September 30, 2000 compared to the $9.1 million recorded in the 1999 period. At September 30, 2000 the unpaid principal balance of the loans serviced for others was $6.4 billion. These loans had a weighted average servicing fee of 0.302% (i.e., 30.2 basis points).

Loan administration fee income for the nine months ended September 30, 2000 decreased $2.9 million to $12.5 million. This decrease also was the result of the decrease in the amount of mortgage loans serviced for others. Fee income before the amortization of serving rights decreased $4.9 million, or 17.8%, for the nine months ended September 30, 2000 compared to the results of the 1999 period.

      Net Gain on Loan Sales

For the three months ended September 30, 2000, net gain on loan sales increased $3.0 million, to $4.2 million, from $1.2 million in the 1999 period. The 2000 period reflects the sale of $1.9 billion in loans versus $2.9 billion sold in the 1999 period. In the 1999 period, mortgage interest rates were rising and the associated pricing spreads achievable on loan sales were extremely tight. The spread achieved during the 1999 period equaled 0.04% (4 b.p.s) versus the 0.21% (21 b.p.s) recorded in the 2000 period.

For the nine months ended September 30, 2000, net gain on loan sales decreased $22.4 million, 69.8%, to $9.7 million, from $32.1 million in the comparable 1999 period. The 2000 period includes the sale of $5.4 billion in loans versus $11.0 billion sold in the 1999 period. For the nine month period ended September 30, 2000, the Company recorded an 18.1 basis point gain on the loans sold versus the 29.1 basis points earned on the loans sold in the 1999 period.

12

Net Gain on the Sale of Mortgage Servicing Rights

For the three months ended September 30, 2000, the net gain on the sale of mortgage servicing rights (“MSR”) increased $1.3 million to $5.3 million, from $4.0 million for the same period in 1999. The increased gain on sale of MSR was primarily due to the increased amount of servicing rights sold in the 2000 period. During the 2000 period the servicing rights to $3.7 billion of loans were sold while in the 1999 period the servicing rights to $2.1 billion of loans were sold.

For the nine months ended September 30, 2000, the net gain on the sale of MSR increased $6.4 million, to $11.3 million, from $4.9 million for the comparable 1999 period. The gain on sale of mortgage servicing rights increased due to the MSR bulk sales involving $3.6 billion in loans during the 2000 period versus $1.0 billion in loans during the 1999 period. When the Company sells MSR’s on a “flow basis”, the underlying loans have been originated within the past three months. The MSR’s sold on a “bulk basis” are typically seasoned.

Activity of Mortgage Loans Serviced for Others( in thousands):

		Three months ended		Three months ended
		September 30, 2000		September 30, 1999
Beginning balance		$	8,402,411	$	11,130,708
Loans sold			1,942,227		2,869,238
	Subtotal		10,344,638		13,999,946
Loans sold servicing released			9,326		—
Servicing sold (flow basis)			1,671,913		2,149,876
Servicing sold (bulk basis)			2,039,734		—
	Subtotal		3,720,973		2,149,876
Amortization			191,722		541,077
Ending balance		$	6,431,943	$	11,308,993

		Nine months ended		Nine months ended
		September 30, 2000		September 30, 1999
Beginning balance		$	9,519,926	$	11,472,211
Loans sold			5,364,332		11,045,978
	Subtotal		14,884,258		22,518,189
Loans sold servicing released			14,173		70,627
Servicing sold (flow basis)			3,878,754		8,339,065
Servicing sold (bulk basis)			3,641,238		1,043,645
	Subtotal		7,524,839		9,453,337
Amortization			927,476		1,755,859
Ending balance		$	6,431,943	$	11,308,993

      Other Fees and Charges

During the three and nine months ended September 30, 2000, the Company recorded $4.5 million and $13.0 million in other fees and charges, respectively. In the comparable 1999 periods, the Company recorded $4.1 million and $10.4 million, respectively. The collection and recording of these fees are dependent on the amount of deposit
accounts, the number of certain types of loans closed and the collection of any miscellaneous fees.

13

Non-Interest Expense

The following table sets forth components of the Company’s non-interest expense, along with the allocation of expenses related to loan originations that are deferred pursuant to SFAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” As required by SFAS No. 91, mortgage loan fees and certain direct origination costs (principally compensation and benefits) are capitalized as an adjustment to the basis of the loans originated during a period. Certain other expenses associated with loan production, however, are not required to be capitalized. These expense amounts are reflected on the Company’s statement of earnings. Management believes that the analysis of non-interest expense on a “gross” basis ( i.e., prior to the deferral of capitalized loan origination costs ) more clearly reflects the changes in non-interest expense when comparing periods.

	Quarter ended						Nine months ended
	September 30,						September 30,
	2000			1999			2000			1999
	(In thousands)
Compensation and benefits	$	16,288		$	14,852		$	45,959		$	46,590
Commissions		7,669			6,492			19,556			21,841
Occupancy and equipment		7,929			5,450			21,402			15,235
Advertising		1,440			833			3,185			2,052
Core deposit amortization		323			322			968			967
Federal insurance premium		147			336			396			943
General and administrative		8,392			5,933			22,231			23,886
Total		42,188			34,218			113,697			111,514
Less: capitalized direct costs of loan closings		(16,550	)		(17,176	)		(41,922	)		(53,151	)
Total, net	$	25,638		$	17,042		$	71,775		$	58,363
Efficiency ratio		60.06	%		56.58	%		62.32	%		52.44	%

Non-interest expense, excluding the capitalization of direct loan origination costs, increased by $8.0 million, or 23.4%, and $2.2 million, or 2.0%, during the three months and nine months ended September 30, 2000, respectively, when compared to the three and nine month period in 1999. The amount of compensation and benefits expenses were up $1.4 million and down $0.7 million, commissions were up $1.2 million and down $2.2 million, occupancy and equipment charges were up $2.4 million and up $6.2 million, and the general and administrative expenses were reported up $2.5 million and down $1.7 million during the comparable three and nine month periods.

As the loan origination results of the period were accumulated, the amount of direct expense related to the origination process was calculated and deferred. During the three and nine months ended September 30, 2000, the direct cost attributable to the loan origination process equaled $826 per loan, or 0.62% of the loan balance, and $782 per loan, or 0.59% of the loan balance, respectively. During the comparable 1999 periods that cost was calculated as $718 per loan, or 0.56% of the loan balance, and $547 per loan, or 0.43% of the loan balance, respectively.

14

Non-Interest Expense (cont’d)

During the quarter ended September 30, 2000, the Company paid its sales staff commissions, which totaled $7.7 million, or 0.29% of loan originations. This amount compares with $6.5 million, or 0.21% of loan originations, paid in the comparable 1999 period. These increases in commissions are reflective of the current compensation structure employed by the Company. Retail loan officers which are part of the Company’s “net branch” program are afforded a larger commission component in exchange for a greater role in the management of the branch office along with an acceptance of responsibility for the branch office’s variable expenses. Members of the wholesale account executive group have been increasingly changed to a total commission based compensation package from their former salary plus commission compensation package. These changes have increased commissions for the nine months ended September 30, 2000 from 0.18% of mortgage originations to 0.28% of mortgage loan originations.

The majority of the $1.4 million increase in compensation and benefits during the third quarter is directly attributable to the eight new bank branches opened during the quarter, and the sixteen new branches maintained during the year 2000 quarter when compared to the 1999 period. These new offices also accounted for the majority of the increased occupancy and equipment costs of $2.4 million during the 2000 quarterly period and the $6.2 million of increase recorded throughout the year 2000. These costs will continue to increase in relation to the general expansion planned within the Company’s retail banking operations. This increase in expenses is offset by the reduction in the cost of funds achieved by Company.

The majority of the $2.5 million increase and the $1.7 decrease in general and administrative expenses represents increased costs associated with the new bank branches offset by decreases in the mortgage loan production costs. The increased occupancy and equipment expense of $6.2 million along with the increased advertising costs are also associated with the opening and maintenance of the additional six bank branches operated during 2000.

Federal Income Taxes

For the three months ended September 30, 2000, the provision for federal income taxes increased $1.3 million to $5.1 million, from $3.8 million for the same period in 1999. The provision was 36.2% and 34.5% of pretax earnings for the periods ended September 30, 2000 and 1999, respectively. For the nine months ended September 30, 2000, the provision for federal income taxes decreased $4.2 million to $12.1 million, from $16.3 million for the same period in 1999. The provision was 36.1% and 35.0% of pretax earnings for the periods ended September 30, 2000 and 1999, respectively.

15

SEGMENT REPORTING

RETAIL BANKING OPERATIONS

The Company provides a full range of banking services to consumers and small businesses in southern and western Michigan. The Bank operated a network of 48 bank branches. The Company has continued to focus on expanding its branch network in order to increase its access to retail deposit funding sources. The retail banking operation allows the Company to cross-market consumer banking services to the Company’s mortgage customers in Michigan.

MORTGAGE BANKING OPERATIONS

Flagstar’s mortgage banking activities involve the origination of mortgage loans or the purchase of mortgage loans from the originating lender. Company personnel originate loans and conduct business from 38 loan origination centers located predominantly in Michigan. Flagstar purchases mortgage loans on a wholesale basis through a network of correspondents consisting of other banks, thrifts, mortgage companies, and mortgage brokers. This mortgage banking network conducts mortgage lending operations nationwide. A majority of the mortgage loans, which are subsequently sold in the secondary mortgage market, conform to the underwriting standards of FHLMC or FNMA.

The following tables present certain financial information concerning the results of operations of Flagstar’s retail banking and mortgage banking operation.

Table 4
Retail Banking Operations

	At or for the quarter ended				At or for the nine months
	September 30,				ended September 30,
	2000		1999		2000		1999
			(In thousands)
Revenues	$	18,124	$	14,798	$	52,993	$	43,377
Earnings before taxes		9,979		11,275		30,104		31,845
Identifiable assets		3,366,924		1,476,456		3,366,924		1,476,456

Table 5
Mortgage Banking Operations

		At or for the quarter ended						At or for the nine months
	September 30,						ended September 30,
		2000		1999				2000		1999
	(In thousands)
Revenues		$	24,021	$	14,751			$	60,628	$	66,074
Earnings before taxes			4,129		(227	)			3,424		14,739
Identifiable assets			2,271,718		2,600,096				2,271,718		2,600,096

16

Financial Condition

      Assets

The Company’s assets totaled $5.6 billion at September 30, 2000, an increase of $1.3 billion, or 30.2%, as compared to $4.3 billion at December 31, 1999. This increase was primarily due to an increase in mortgage loans held for investment.

Cash and cash equivalents

Cash and cash equivalents decreased from $118.6 million at December 31, 1999 to $39.8 million at September 30, 2000

      Loans receivable, net

		September 30, 2000			June 30, 2000			December 31, 1999			September 30, 1999
Mortgage loans held for sale		$	1,900,961		$	1,625,509		$	2,230,381		$	2,227,058
Single family mortgage			2,798,714			2,529,970			1,169,781			789,141
Second mortgage			134,644			199,338			145,075			112,845
Residential construction			56,373			51,818			46,838			40,319
Commercial real estate			185,712			182,689			143,652			108,191
Warehouse lending			57,779			56,548			46,221			52,747
Commercial			9,408			9,071			7,024			4,601
Consumer			56,961			52,901			42,758			37,270
Total loans held for investment			3,299,591			3,082,335			1,601,350			1,145,114
	Allowance for losses		(25,000	)		(25,000	)		(23,000	)		(21,500	)
Total loans receivable, net		$	5,175,552		$	4,682,844		$	3,808,731		$	3,350,672

Loans receivable, net increased $1.4 billion, from $3.8 billion at December 31, 1999 to $5.2 billion at September 30, 2000.

Mortgage loans available for sale decreased $0.3 billion, or 13.6%, to $1.9 billion at September 30, 2000, from $2.2 billion at December 31, 1999. This decrease is reflective of the decrease in the loan originations generated during the period ending September 30, 2000.

Loans held for investment increased $1.7 billion, or 106.3%, from $1.6 billion at December 31, 1999 to $3.3 billion at September 30, 2000. This increase is attributable to Management’s strategy to enlarge the asset and liability base of the Company. As can be viewed above, each category of investment loans has increased period to period except warehouse lending and second mortgages. Warehouse lending is driven by the funding needs of other mortgage lenders. In a period of slow loan volume warehouse lending balances will decline. In the third quarter the Company sold a portion of the second mortgages to the secondary market.

17

      Allowance for losses

The allowance for losses totaled $25.0 million at September 30, 2000, an increase of $2.0 million, or 8.7%, from $23.0 million at December 31, 1999. The allowance for losses as a percentage of non-performing loans was 50.0% and 55.0% at September 30, 2000 and December 31, 1999, respectively. The Company’s non-performing loans totaled $50.0 million and $41.8 million at September 30, 2000 and December 31, 1999, respectively. The allowance for losses as a percentage of total loans, was 0.48% and 0.60% at September 30, 2000 and December 31, 1999, respectively. The increase in the dollar amount of the allowance for losses was based upon management’s assessment of relevant factors, including the types and amounts of non-performing loans, historical, and anticipated loss experience on such types of loans, and current and projected economic conditions.

FHLB stock

Holdings of FHLB stock increased from $79.9 million at December 31, 1999 to $98.8 million at September 30, 2000 in response to the Company’s increased mortgage loan portfolio. As a member of the FHLB, the Bank is required to hold shares of FHLB stock in an amount at least equal to 1% of the aggregate unpaid principal balance of its home mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or 1/20th of its FHLB advances, whichever is greater.

      Accrued interest receivable

Accrued interest receivable increased from $26.6 million at December 31, 1999 to $38.5 million at September 30, 2000 as the Company’s interest earning asset portfolio increased. The Company typically collects interest in the following month after it is earned.

      Repossessed assets

Repossessed assets increased from $21.4 million at December 31, 1999 to $23.4 million at September 30, 2000 The increased was caused by the Company’s foreclosure proceedings upon non-performing loans.

      Mortgage servicing rights

Mortgage servicing rights totaled $102.4 million at September 30, 2000, a decrease of $29.4 million, or 22.3%, from $131.8 million at December 31, 1999. During the nine months ended September 30, 2000, the Company capitalized $106.0 million, amortized $10.2 million, and sold $125.2 million in mortgage servicing rights. The principal balance of the loans serviced for others stands at $6.4 billion at September 30, 2000 versus $9.5 billion at December 31, 1999. The capitalized value of the mortgage servicing rights was 1.59% and 1.38% value at September 30, 2000 and December 31, 1999, respectively.

      Other assets

Other assets decreased $16.6 million, or 21.8%, to $59.4 million at September 30, 2000, from $76.0 million at December 31, 1999. The majority of these balances are attributable to the collection of receivables previously recorded in conjunction with the sale of MSR’s. Upon the sale of MSR’s a receivable is recorded for a portion of the sale proceeds. The balance due is paid within 180 days after the sale date.

18

Liabilities

The Company’s total liabilities increased $1.3 billion, or 31.7%, to $5.4 billion at September 30, 2000, from $4.1 billion at December 31, 1999. This increase was attributable to an large increases in retail deposits, wholesale deposits, FHLB advances, accrued interest payable, checks issued, and federal income tax payable offset by decreases in undisbursed payments and escrow accounts.

      Retail deposits

			September 30, 2000								December 31, 1999
			Balance		Rate			%			Balance		Rate			%
DDA:
Non-interest bearing			$	9,967		0.01	%		0.57	%	$	7,088		0.03	%		0.55	%
Interest bearing				7,206		2.03			0.41			6,504		1.89			0.50
Interest bearing (tiered)				83,157		4.60			4.74			74,904		4.47			5.79
Business				28,778		0.23			1.64			48,923		0.01			3.78
		Total		129,108		3.12			7.36			137,419		2.53			10.63
Savings:
Statement				14,533		3.11			0.83			15,162		3.03			1.17
Statement plus				323,705		5.32			18.45			343,851		5.17			26.59
		Total		338,238		5.22			19.28			359,013		5.08			27.76
Certificates of deposits				1,286,861		6.56			73.36			796,751		5.72			61.61
	Total retail deposits		$	1,754,207		6.05	%		100.00	%	$	1,293,183		5.20	%		100.00	%

Retail deposits accounts increased $0.5 billion, or 38.5%, to $1.8 billion at September 30, 2000, from $1.3 billion at December 31, 1999. This increase reflects the Company’s strategy to grow its branch network and to increase its market penetration. The number of bank branches increased from 35 at December 31, 1999 to 48 at September 30, 2000. The 13 new bank branches have added $128.7 million in new deposits to the Company’s total. In June 2000, the Company opened its first banking center in a Wal-Mart Superstore. The Company has signed agreements to open 39 of these banking centers within the next three years. These new banking centers although being opened a short period of time have contributed $28.4 million of the newly generated deposits. The Company has signed agreements or has begun construction on 30 more banking centers which will be in operation by December 31, 2001.

      Wholesale deposits

Wholesale deposits increased $0.6 billion, or 60.0%, to $1.6 billion at September 30, 2000, from $1.0 billion at December 31, 1999. This increase in deposits is reflective of the Company’s aggressive growth strategy during the nine month period. These funds are composed entirely of certificates of deposit. These funds were brokered, garnered through the secondary markets, or are solicited from local municipalities. These deposits carried a weighted average cost of 6.36%.

19

      FHLB advances

FHLB advances increased $0.2 billion, or 13.3%, to $1.7 billion at September 30, 2000, from $1.5 billion at December 31, 1999. The Company relies upon such advances as a source for both short term and long term funding. The short term funding needs of the Company arises from the origination or purchase of loans, which later are sold into the secondary market. The long term needs of the Company occur when management needs a fixed rate instrument to lengthen the duration of its liabilities. The outstanding balance of FHLB advances fluctuates from time to time depending upon the Company’s current inventory of loans held for sale and the availability of lower cost funding from its retail deposit base and its escrow accounts.

      Long term debt

On April 30, 1999, the Company issued $74.8 million of 9.50% preferred securities to the general public in an initial public offering. The securities were issued by the Company’s subsidiary, Flagstar Trust, a Delaware trust. These preferred securities mature in 30 years, pay interest quarterly, and the interest expense is deductible for federal income tax purposes. The net proceeds from the offering were contributed to Flagstar Bank as additional paid in capital and is included as regulatory capital.

      Accrued interest payable

Accrued interest payable increased from $15.7 million at December 31, 1999 to $41.0 million at September 30, 2000 as the Company’s total loan portfolio increased. The Company typically pays interest on its debt within the following quarter after it is accrued. This large increase (161.1%) is considered immaterial after consideration is given to the 34.2% increase in the paying liability portfolio.

      Undisbursed payments on loans serviced for others

Undisbursed payments on loans serviced for others decreased $25.1 million, or 36.3%, to $44.1 million at September 30, 2000, from $69.2 million at December 31, 1999. These amounts represent payments received from borrowers for interest, principal and related loan charges, which have not been remitted to the respective investors. These balances fluctuate with the size of the servicing portfolio and increase during a time of high payoff or refinance volume. This substantial change is attributable to the general slowdown in the refinance volume experienced in the mortgage servicing portfolio.

      Escrow accounts

Customer escrow accounts decreased $3.4 million, or 4.5%, to $71.9 million at September 30, 2000, from $75.3 million at December 31, 1999. These amounts represent payments received from borrowers for taxes and insurance payments, which have not been remitted to the tax authorities or insurance providers. These balances fluctuate with the size of the servicing portfolio and during the year before and after the remittance of scheduled payments.

      Liability for checks issued

Liability for checks issued increased $25.4 million, or 83.6%, to $55.8 million at September 30, 2000, from $30.4 million at December 31, 1999. These amounts represent checks issued to acquire mortgage loans that have not cleared for payment. These balances fluctuate with the size of the mortgage pipeline.

20

Federal income taxes payable

Federal income taxes payable increased $1.2 million, or 2.4%, to $51.4 million at September 30, 2000, from $50.2 million at December 31, 1999. This increase is attributable to the accrual of deferred taxes during the nine months ended September 30, 2000.

      Other liabilities

Other liabilities decreased $0.4 million, or 0.6%, to $70.3 million at September 30, 2000, from $70.7 million at December 31, 1999. This decrease is deemed immaterial.

21

Liquidity and Capital Resources

      Liquidity

Liquidity refers to the ability or the financial flexibility to manage future cash flows to meet the needs of depositors and borrowers and fund operations on a timely and cost-effective basis. The Company has no other significant business than that of its wholly owned subsidiary, Flagstar Bank, FSB.

The Bank is required by the Office of Thrift Supervision (“OTS”) regulations to maintain minimum levels of liquid assets. This requirement, which may be changed at the discretion of the OTS depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The required minimum ratio is currently 4.00%. While the Bank’s liquidity ratio varies from time to time, the Bank has generally maintained liquid assets substantially in excess of the minimum requirements. The Bank’s average daily liquidity ratio was 10.38% for the quarter ended September 30, 2000.

A significant source of cash flow for the Company is the sale of mortgage loans held for sale. Additionally, the Company receives funds from loan principal repayments, advances from the FHLB, deposits from customers and cash generated from operations.

Mortgage loans sold during the three months ended September 30, 2000 totaled $1.9 billion, a decrease of $1.0 billion, or 34.5% from $2.9 billion sold during the same period in 1999. This decrease in mortgage loan sales was attributable to the 10.0% decrease in mortgage loan originations and the 10.6% increase in the loan portfolio during the quarter. The Company sold 70.4% and 96.7% of its mortgage loan originations during the three month periods ended September 30, 2000 and 1999, respectively.

Mortgage loans sold during the nine months ended September 30, 2000 totaled $5.4 billion, a decrease of $5.6 billion, or 50.9% from $11.0 billion sold during the same period in 1999. This decrease in mortgage loan sales was attributable to the 42.3% decrease in mortgage loan originations and the 36.8% increase in the loan portfolio during the period. The Company sold 76.1% and 89.4% of its mortgage loan originations during the nine month periods ended September 30, 2000 and 1999, respectively.

The Company typically uses FHLB advances to fund its daily operational liquidity needs and to assist in funding loan originations. The Company will continue to use this source of funds until a more cost-effective source of funds becomes available. FHLB advances are used because of their flexibility. These funds are typically borrowed for terms that are less than one year with no prepayment penalty. The Company had $1.7 billion outstanding at September 30, 2000. Such advances are repaid with the proceeds from the sale of mortgage loans held for sale. The Company currently has an authorized line of credit equal to $2.0 billion. This line is collateralized by non-delinquent mortgage loans. To the extent that the amount of retail deposits or customer escrow accounts can be increased, the Company expects to replace FHLB advances.

At September 30, 2000, the Company had outstanding rate-lock commitments to lend $938.9 million in mortgage loans, along with outstanding commitments to make other types of loans totaling $27.3 million. Because such commitments may expire without being drawn upon, they do not necessarily represent future cash commitments. Also, at September 30, 2000, the Company had outstanding commitments to sell $1.2 billion of mortgage loans. These commitments will be funded within 90 days. Total commercial and consumer unused lines of credit totaled $268.6 million at September 30, 2000. Such commitments include $252.0 million in warehouse lines of credit to various mortgage companies, of which $57.8 million was advanced at September 30, 2000.

      Capital Resources.

At September 30, 2000, the Bank exceeded all applicable bank regulatory minimum capital requirements. The Company is not subject to any such requirements.

22

STOCK BUYBACK

The board of directors of Flagstar Bancorp released data on October 31, 2000 that stated that the Company has repurchased a total of 1.8 million shares, or approximately 13.1 % of its outstanding shares prior to the commencement of the program. The repurchased shares are reserved for later reissue in connection with future stock dividends, dividend reinvestment plans, and employee benefit plans.

Item 3. Market Risk

In its mortgage banking operations, the Company is exposed to market risk in the form of interest rate risk from the time the interest rate on a mortgage loan application is committed to by the Company through the time the Company sells or commits to sell the mortgage loan. On a daily basis, the Company analyzes various economic and market factors and, based upon these analyses, projects the amount of mortgage loans it expects to sell for delivery at a future date. The actual amount of loans sold will be a percentage of the number of mortgage loans on which the Company has issued binding commitments (and thereby locked in the interest rate) but has not yet closed (“pipeline loans”) to actual closings. If interest rates change in an unanticipated fashion, the actual percentage of pipeline loans that close may differ from the projected percentage. The resultant mismatching of commitments to fund mortgage loans and commitments to sell mortgage loans may have an adverse effect on the results of operations in any such period. For instance, a sudden increase in interest rates can cause a higher percentage of pipeline loans to close than projected. To the degree that this is not anticipated, the Company will not have made commitments to sell these additional pipeline loans and may incur losses upon their sale as the market rate of interest will be higher than the mortgage interest rate committed to by the Company on such additional pipeline loans. To the extent that the hedging strategies utilized by the Company are not successful, the Company’s profitability may be adversely affected.

Management believes there has been no material change in either interest rate risk or market risk since December 31, 1999.

23

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

      None.

Item 2. Changes in Securities

      None.

Item 3. Defaults upon Senior Securities

      None.

Item 4. Submission of Matters to a Vote of Security Holders

      None.

Item 5. Other Information

      None.

Item 6. Exhibits and Reports on Form 8-K

      (a) Exhibits

      Exhibit 11. Computation of Net Earnings per Share

      Exhibit 27 (SEC Use only)

      (b)       Reports on Form 8-K

      None

24

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		FLAGSTAR BANCORP, INC.
Date:	November 13, 2000	/S/ Thomas J. Hammond
		Thomas J. Hammond Chairman of the Board and Chief Executive Officer (Duly Authorized Officer)
		/S/ Michael W. Carrie
		Michael W. Carrie Executive Vice President (Principal Accounting Officer)

25

Exhibit Index

Exhibit No.	Description
11	Computation of Net Earnings per Share
27	Financial Data Schedule